Recent years have brought significant challenges to the European manufacturing sector. Supply chain disruptions due to the pandemic, ongoing workforce shortages, and the energy crisis have created a landscape of uncertainty. As we move into 2024, manufacturers must tackle these challenges, with an added layer of preparation for The Corporate Sustainability Reporting Directive (CSRD). Dave Duncan, Vice President of Sustainability at PTC shares his thoughts.
CSRD is new European Commission legislation aimed at driving more sustainable business practices at companies that operate in and export to the EU. Starting in 2024, over 50,000 companies will need to comply with CSRD emissions reductions and reporting requirements.
To date, we’ve seen many companies set ambitious decarbonization commitments. More than 6,000 have signed up through the Science Based Targets initiative. 66% of Fortune 500 companies have pledged net zero. And net zero targets cover 65% of the annual revenue of the world’s largest 2,000 companies.
However, analysis has shown that these commitments have yet to be translated into action. Net Zero Tracker found that only 4% of company net-zero commitments are accompanied by a clear plan for how to achieve that goal.
Among discrete manufacturers, the opportunity to decarbonize supply chains and product offerings is hitting an inflection point. Over the next year, we expect CSRD to act as a forcing function that changes the way they approach sustainability. It could kick off a wave of aggressive decarbonization. This is possible due to the rapid advancement of digital technology over the past few years.
Technology like AI, IoT, and PLM will play a leading role in turning discrete manufacturers’ commitments into reality. Those who prioritize digital transformation and product innovation now will be able to capture a potential of billions in annual sales by 2030.
As the new year progresses, we expect to see this shift manifest in five ways.
1. Sustainability and Profitability Working Together
Sustainability has long been thought of as a cost center rather than a value center. Research conducted by Capgemini in 2022 found that 53% of respondents believed that the cost of pursuing sustainability initiatives outweighs the potential benefit. Contrary to this sentiment, the same report found that organizations that were prioritizing sustainability were already outperforming organizations that weren’t.
There can indeed be upfront costs associated with implementing sustainable practices. But the long-term benefits often outweigh these initial investments. Sustainability can drive efficiency and cost savings, innovation, risk mitigation, and enhanced competitiveness. It is an integral aspect of a manufacturer’s overall strategy rather than simply a cost center.
As McKinsey notes,
“Companies that reduce costs and emissions simultaneously can gain market share and finance further decarbonization efforts through the additional cash generated. Leading companies typically go after the first 20 to 40 percent of decarbonization while also reducing costs, leading to an improvement in EBITDA.”
In 2024, we expect manufacturers to capitalize on the fact that sustainability and profitability can work hand in hand. Thanks to the acceleration of digital transformation, discrete manufacturers are now at a stage of digital maturity. They can now leverage the tools that align their financial goals with the decarbonization of their product offerings.
One example of this is generative design. This idea is to use generative AI to create optimal designs from a set of requirements and constraints. Users define the design problem, and the engine determines an array of optimal solutions, often many that no human would. It can be achieved in hours or days which would take designers weeks or months to do by themselves. It opens the door for previously unfeasible designs.
Manufacturers like Cummins are leading by example. They are leveraging generative design and 3D simulation within their computer-aided design (CAD) software to create and test parts that use 10-15% less material than conventionally designed parts.
2/ Sustainability as a Core Product Design Factor
During the product development phase, experts estimate that decisions determine over 80% of all product-related environmental impacts. Material and component supplier selections are typically a top two footprint contributor. For energy-intensive products like cars, customer use can be an even bigger contributor. The decisions that contribute to Scope 3 emissions offer the greatest opportunity to make significant reductions. In 2024, we expect to see manufacturers start embedding sustainability criteria into the fabric of design decisions.
Typical design criteria include cost, performance, risk, time-to-market, durability, reliability, manufacturability, and so on. With CSRD looming, factors such as the footprint of materials, the decarbonization trajectory of suppliers, the ability to reuse components and energy efficiency will be added to the mix. The decarbonization trajectory of suppliers is especially important. We expect to see situations where suppliers with more aggressive plans are selected over cleaner suppliers who have a less ambitious decarbonization ramp.
As manufacturers progress through the design phase, technology will be key to enabling the rapid iterations in product design needed to meet CSRD-mandated reduction commitments. This looks like using CAD and product lifecycle management (PLM) tools to assess the environmental impact of materials and suppliers, choose the right manufacturing process up front, lightweight designs, and run 3D simulations to verify and iterate on designs digitally, reducing physical prototyping. By using these tools to optimize designs and manufacturing processes early and often, manufacturers can both innovate faster and reduce costs.
3/ IoT as Non-Negotiable to Reduce Factory Emissions
While typically only 1-10% of overall emissions, factory emissions represent a significant portion, or even the majority, of the operational Scope 1 and Scope 2 emissions that manufacturers can reduce, making them a priority in 2024.
In the factory, the IoT plays an integral role in optimizing energy use, reducing waste, and improving overall equipment effectiveness (OEE). However, many manufacturers remain hesitant about IoT adoption due to perceived challenges such as implementation costs, effort, and disruption.
In 2024, we expect CSRD to push manufacturers toward factory modernization. IoT will shift from a competitive advantage enjoyed by early adopters to a non-negotiable for any manufacturer that needs to reduce carbon emissions. Using IoT sensors to monitor emissions directly from manufacturing processes, manufacturers can accurately measure their carbon footprint and comply with regulations.
They can also identify energy-intensive operations and implement optimization strategies to reduce overall energy usage by monitoring energy consumption in real time. CIMC, a leading supplier of logistics and energy equipment, has adopted this strategy, using IoT-enabled energy management software to reduce energy consumption by 13%.
Beyond this, IoT also powers bottleneck analysis, which automatically identifies top OEE-hindering constraint priorities on the factory site, allowing manufacturers to uncover opportunities to increase efficiency and reduce waste. Running this analysis early in the production cycle further reduces errors and defects, preventing waste and rework.
4/ Investment in Circularity and Modular Design
Circularity, a key sustainability principle, focuses on reducing waste and maximizing resource use through closed-loop systems. In 2024, manufacturers are expected to prioritize circularity more. Modular design will emerge as a crucial strategy for decarbonizing product offerings.
Modular design involves creating products with interchangeable components that can be easily disassembled, reused, repaired, upgraded, or recycled. Modularity increases product longevity and circularity as parts and components get reused and remanufactured, rather than sent to a landfill.
Modularity also enables more efficient factory tooling and reduces the costs of market-demanded product variations. Technology will be crucial in facilitating modular design by managing the downstream complexity associated with it. This may involve providing frontline workers with digital tools offering 3D work instructions.
5/ Tipping Point for Product-Service Systems
The adoption of product-service system (PSS) models has been ongoing for years. However, like IoT, many manufacturers hesitate due to perceived risks and investments. Despite being transformative, transitioning to a customer-centric PSS model offers benefits like recurring revenue streams and improved customer relationships.
But what may be most convincing to manufacturers is the extended producer responsibility (EPR) for high-value assets included in CSRD. EPR requires manufacturers to be responsible for the entire lifecycle of their products. It means they need to find ways to reduce materials use, enhance product reusability and recyclability, and improve waste management.
A product-service system incentivizes manufacturers to make products more modular and repairable. It also extends the life of products through service and prioritizes refurbishment, remanufacturing, and responsible end-of-life management. This positions PSS as a key strategy for reaching the sustainability goals outlined in CSRD.
In 2024, there will be an opportune mix of government regulations, technological advancement, and consumer pressure. Will this be the year those empty commitments turn into action? We’ll have to wait and see. But from where we stand in discrete manufacturing, the future looks bright for sustainability progress.